JAL KETH L.

ABUEVA
MBA
FINMAN

Section 1: Theoretical Knowledge and Calculations

Time Value of Money Concept

1. You have just bought a security which pays P 500 every six months. The security lasts for ten
years. Another security of equal risk also has a maturity of ten years and pays 10 percent
compounded monthly. Calculate the price of the security that you just purchased.

Answer:

1. First Security: Cash flow of P 500 every six months.

Given information:
 Cash flow ©= P 500
 Number of periods (n)=20 (10 years x 2 periods per year=20 periods)
 Interest rate per six-month period (r1)=0.03 (6% annual interest rate divided by 2)

Using the formula for present value:

PV1= C = ___500___
(1+r1) (1+0.03)20

Calculate:
PV1 = 500_ = 500 x 0.553675026 = P 276.837513
(1.03)20

2. Second Security: 10% compounded monthly.

Given information:
 Csah flow (C) = P 500
 Number of periods (n)=20
 Interest rate per six month period (r2)=0.05 (10% annual interest rate divided by 2)

Using the formula for present value:

PV2 = C = 500
(1+r2)n (1+0.05)20

Calculate:
PV2 = 500 = 500 x 0.376889288 = P188.444644

Comparing the two present values:

 PV1 = P 276.837513
 PV2 = P 188.444644

Explanation:
As we have observed that the price of the security I recently bought is more expensive than the
first security, which pays P 500 every six months. With a 10% annual interest rate compounded
monthly, it has a higher present value than the second security. This suggests that because of its more
frequent cash flows and slightly lower interest rate, the first security is valued more in the market.
2. Steven just deposited P 10,000 in a bank account that has a 12 percent nominal interest rate,
and the interest is compounded monthly. Steven also plans to contribute another P 20,000 to
the account two years from now. How much will be in the account three years (36 months) from
now?

Answer:

Given information:
 Initial Deposit (P1) = P 10,000
 Nominal interest rate (r) = 12 % per year
 Compounding frequency = Monthly
 Future contribution (P2) = P 20,000
 Time until the future contribution (t) = 2years

Future value of the initial deposit after three years (36 months);

Using the formula for compounded interest:

FV1 = P1 x ( 1+ r ) nt
n

Where:

 P1 = P 10,000
 r = 0.12
 n = 12 (Compounded monthly)
 t = 3 years

For the Future value of the initial deposit:

FV1 = P 10,000 x (1 + 0.12) 12x3

FV1 = 14,495.10

For the future value of the future contribution after two years (24 months);

Using the same formula:

 P2 = P 20,000
 r and n remain the same
 t = 2 years

The future value of the future contribution:

FV2 = P20,000 x (1 + 0.12 ) 12x2

12
FV2 = P 24,944.53

The total amount in the account three years (36months) from now by summing up the two future
values:

Total Future Value = FV1 + FV2

Total Future Value = 14,495.10 + 24,944.53
Total Future Value = P 39, 439.63- This is the total amount in the account three years from now.
Financial Statement and Financial Statement Analysis
3. SABIN ELECTRONICS
STATEMENT OF FINANCIAL POSITION
AS OF DEC. 2021

ASSETS
CURRENT ASSETS
CASH 7 0, 000.00
ACCOUNTS RECEIVABLE 480, 000.00
INVENTORIES 950, 000.00
PREPAID EXPENSES 20, 000.00
TOTAL CURRENT ASSETS 1, 520, 000.00

NON CURRENT ASSETS

PLANT AND EQUIPMMENT, NET 1, 480, 000

TOTAL ASSETS 3, 000, 000.00

LIABILITIES AND OWNERS’ EQUITY

CURRENT LIABILITIES 800, 000.00

NON-CURRENT LIABILITIES
BONDS PAYABLE 600, 000.00
TOTAL LIABILITIES 1, 400, 000.00

SHAREHOLDERS EQUITY
PREFERRED STOCK 250, 000.00
COMMON STOCK 500, 000.00
RETAINED EARNINGS 850, 000.00

TOTAL SHAREHOLDERS EQUITY 1, 600,000.00

TOTAL LIABILITIES AND EQUITY 3, 000, 000.00

SABIN ELECTRONICS
INCOME STATEMENT
FOR THE YEAR 2021

REVENUE: 5, 000,000.00

SALES
LESS: COST OF GOOD SOLD 3, 875, 000.00

GROSS PROFIT 1,125, 000. 00

LESS: OPERATING EXPENSES

SELLING AND ADMIN EXPENSES 653, 000.00
DEPRECIATION EXPENSE 50, 000.00

TOTAL OPEX 703, 000.00

EBIT 422, 000.00

INTEREST 72, 000.00
EBT 350, 000.00
TAX 120, 000.00
NET INCOME 230, 000.00
A. PROFITABILITY

1. NET INCOME 230, 000.00

5, 000000
SALES

ANSWER: 4.60%

A company's profitability is determined by how much profit it makes for every dollar of sales. As
we can see from the math above, the corporation retains 4.60% of its sales as profit, or a profit
margin of around 4.60%.

2. RETURN ON ASSET

NET INCOME 230, 000.00

TOTAL ASSETS 3, 000, 000.00

ANSWER: 7.67%

According to the calculation, the company earns a return on assets (ROA) of about 7.67%.
ROA assesses how well a company uses its assets to generate profit.

3. RETURN ON EQUITY 230, 000.00

TOTAL EQUITY 1, 600, 000.00

ANSWER: 14.38%

ROE assesses how effectively a business turns equity into profits. The data suggests that the
company gets a return on its equity capital of about 14.38%.

4. EARNINGS PER SHARES 210, 000.00

NET INCOME -PREFERRED 10, 000.00
Dividends
NO. OF SHARES OUTSTANDING

ANSWER: 21.00

The company's earnings per share, or EPS, reflects the amount of profit allotted to each
outstanding share of ordinary stock and reveals that it is almost P10.90.

In conclusion, the company has a moderate profit margin, which means it keeps a little
percentage of its sales as profit, according to the profitability study of the company. Its return on
equity and return on assets are both modest, indicating a tolerably efficient use of its equity and
assets to produce profit. The earnings per share, at P10.90 on average, represents the profits
distributed to each outstanding share. The business also shows modest profitability. While the
company's profit margin implies that it keeps a fair amount of its sales as profit, its ROA and
ROE numbers show that it uses its assets and equity effectively to produce returns.
Shareholders might estimate the earnings ascribed to their ownership based on the EPS value
of P10.90. However, it's crucial to take industry into account.
B. LIQUIDITY

1. CURRENT RATIO
CURRENT ASSET 1, 520,000.00
CURRENT LIABILITIES 800, 000.00

ANSWER: 1.90

The current ratio gauges how well the business can use its short-term assets to pay its short-
term liabilities. If the ratio is more than 1, the company's current assets are greater than its
current liabilities. The current ratio in this instance is 1.90, which is a good indicator. It implies
that the corporation has $1.90 in current assets for every dollar in current liabilities. This
suggests that it will be able to satisfy its short-term financial obligations with ease.

2. QUICK RATIO
CURRENT ASSETS-INV.-PREPAYMENTS 550, 000.00
CURRENT LIABILITIES 800, 000.00

ANSWER: 0.69

Due to the fast ratio's exclusion of inventories and prepayments from current assets, it is often
referred to as the acid-test ratio and is a stricter metric of liquidity. A fast ratio of 0.69 means
that, excluding inventories and prepayments, the company has $0.69 in highly liquid assets to
cover each dollar of current liabilities. This ratio is smaller than the current ratio, indicating that
inventory and other less liquid assets account for a sizable share of the company's current
assets. If inventory cannot be swiftly converted to cash, this may point to a possible risk in the
company's capacity to satisfy immediate obligations.

3. CASH RATIO 65, 000.00

CURRENT LIABILITIES 800, 000.00

ANSWER: 0.08

The cash ratio, which only counts cash and cash equivalents as assets, is the most conservative
liquidity ratio. A ratio of 0.08 means that for every dollar in current liabilities, the company has
$0.08 in cash. Even though this is a low ratio, it's crucial to remember that many businesses
frequently have low cash ratios because they keep some of their liquidity in other ways, such as
marketable securities, which are not taken into account in this ratio. This can also mean that the
business heavily depends on non-cash sources to pay its obligations, though.

4. NWC TO TOTAL ASSETS

NET WORKING CAPITAL 720, 000.00
TOTAL ASSETS 3, 000, 000.00

ANSWER 0.24

The ratio of net working capital, or current assets less current liabilities, to total assets, is
known as the net working capital to total assets (NWC) ratio. A ratio of 0.24 indicates that the
net working capital of the company finances about 24% of its total assets. This shows that a
sizeable amount of the company's assets are financed by short-term resources, which can be
an indication of effective resource use but may also signal a bigger risk if the company's
short-term obligations rise.

In conclusion, the current ratio and NWC to Total Assets ratio suggest that the company has
strong liquidity. However, if the business has trouble turning its less liquid assets into cash
rapidly, the lower quick ratio and cash ratio scores may point to potential short-term
weaknesses. To have a more complete knowledge of the company's liquidity condition, it is
crucial to take these measures into account together with industry standards and trends.
 Additionally, the evaluation of liquidity takes into account qualitative elements like the business
model of the organization, the state of the market, and management approaches.

C. SOLVENCY

1. TOTAL DEBT RATIO 1, 400,000.00

TOTAL LIABILITIES 3, 000, 000.00

ANSWER: 0.47

The total debt ratio calculates what percentage of a business's assets are financed by debt. If
the ratio is 0.47, debt financing accounts for 47% of the company's total assets. This shows
that the corporation finances a sizeable amount of its assets through borrowing. A greater
ratio can imply a higher level of financial risk as a larger portion of the company's assets is
subject to prospective payback obligations even while this ratio is below 1 (which shows that
assets are partially supported by equity).

2. DEBT-EQUITY RATIO

TOTAL DEBT 1,400,000.00

TOTAL EQUITY 3,000, 000.00

ANSWER: 0.88

The debt-equity ratio evaluates the relationship between a company's total debt and equity. With a ratio
of 0.88, the company has $0.88 more in debt than it does in equity. The corporation is therefore more
dependent on stock financing than debt financing, according to this. The fact that this ratio is still
somewhat high indicates that there is a sizable amount of debt relative to equity. When a corporation
struggles to make enough money to cover interest and principal payments, a high debt-to-equity ratio
can be a sign of increased financial leverage and potential risk.

3. LONG TERM DEBT RATIO

LONG TERM DEBT 600, 000.00

TOTAL ASSETS 3, 000, 000.00

ANSWER 0.20

The percentage of a company's total assets that are financed by long-term debt is measured
by the long-term debt ratio. A ratio of 0.20 indicates that long-term debt accounts for 20% of
the company's assets. This shows that, as opposed to long-term debt, the company depends
more on short-term liabilities and equity to finance its operations. A lower long-term debt ratio
is typically viewed favorably since it suggests a lesser reliance on long-term debt for
financing, lowering the chance that high interest costs would negatively impact profitability.

4. TIMES INTEREST EARNED RATIO

EBIT 422, 000.00

INTEREST EXPENSE 72, 000.00

ANSWER: 5.86
The ability of a corporation to cover its interest costs with earnings before interest and taxes (EBIT) is
gauged by the times interest earned ratio. A ratio of 5.86 means that the difference between the
company's interest expense and EBIT is 5.86 times greater. This ratio, in my opinion, is positive and
indicates that the corporation has a sufficient margin of safety to satisfy its interest obligations. A
stronger ability to manage responsibilities connected to debt is indicated by higher values of this ratio.
 D. COMPANYS EFFICIENCY

1. INVENTORY TURNOVER
COGS 3,875,000.00
AVE.INV. 775, 000.00

ANSWER: 5.00
The effectiveness of a company's inventory management is gauged by its inventory turnover
ratio. A ratio of 5.00 means that the company's inventory is refilled and sold five times over a
predetermined timeframe (often a year). This shows that the business is moving its inventory
and turning it into sales effectively. A higher turnover is typically preferred because it shows that
the business is not investing surplus capital in inventories.DAYS SALES IN INVENTORY

365 DAYS 365

INVENTORY TURNOVER 5.00

ANSWER: 73.00

The DSI measures the typical time it takes for a business to sell all of its inventory. A DSI of 73.00
means that it typically takes the company 73 days to sell all of its inventory. This is consistent with the
inventory turnover ratio, which shows a lower DSI when the turnover ratio is higher. A lower DSI is
typically better because it indicates that inventory is turning into sales more quickly.

2. RECEIVABLE TURNOVER

CREDIT SALES 5,000, 000.00

AVE.ACCOUNTS RECEIVABLE 255, 000.00

ANSWER: 19.61

The efficiency with which a business collects payments from clients is gauged by its
receivable turnover ratio. A ratio of 19.61 means that during the period under consideration,
the company collected their accounts receivable roughly 19.61 times. This implies that the
company is managing credit and collection effectively and transforming credit sales into cash
rather rapidly.

3. COLLECTION PERIOD/DSO

365 DAYS 365

RECEIVABLE TURNOVER 9.61

ANSWER: 18.62
Days Sales Outstanding (DSO), another name for the collection period, is a measure of how
long it typically takes to collect accounts receivable. A DSO of 18.62 indicates that it typically
takes the business 18.62 days to obtain payments from its clients. In general, a lower DSO is
preferable because it shows that the business is effective at collecting its receivables.

4. NWC

SALES 5, 000,000.00
NET WORKING CAPITAL 720, 000.00

ANSWER: 6.94
Net Working Capital measures the company's ability to meet its short-term obligations. A
ratio of 6.94 implies that for every dollar of sales, the company has $6.94 in net working
capital. This suggests that the company has a good amount of working capital to cover its
operational needs and potential short-term obligations.
 5. FIXED ASSET TURNOVER

SALES 5, 000, 000.00

NET FIXED ASSETS 1,480, 000.00

ANSWER: 3.38
The fixed asset turnover ratio evaluates how efficiently a company uses its fixed assets to
generate revenue. A ratio of 3.38 indicates that for every dollar of net fixed assets, the
company generates $3.38 in sales. This suggests a moderate level of efficiency in utilizing
fixed assets to drive revenue.

6. TOTAL ASSET TURN OVER

SALES 5, 000, 000.00

TOTAL ASSET 3, 000, 000.00

ANSWER: 1.67
The total asset turnover ratio measures how efficiently a company uses all its assets to
generate revenue. A ratio of 1.67 suggests that for every dollar of total assets, the company
generates $1.67 in sales. This ratio indicates that the company's efficiency in asset utilization
might be relatively lower, as the revenue generated is not significantly high compared to the total
assets.

E. Describe the overall financial health of the company in relation to the industry average

Well, based on the provided financial ratios and indicators, the Profitability of
The company indicate moderate performance. The profit margin of 4.60% is relatively modest,
indicating that the company retains around 4.60% of its sales as profit. While this may suggest
that the company has some control over its costs, it's important to compare this margin with
industry averages to determine whether it's competitive.

In Liquidity: The company's liquidity ratios show a mixed picture. The current ratio of 1.90
indicates a healthy ability to cover short-term obligations, and the NWC to Total Assets ratio of
0.24 suggests that the company efficiently utilizes its net working capital to support its assets.
However, the quick ratio and cash ratio are relatively lower, indicating that a significant portion of
the company's current assets might be tied up in less liquid assets. This could be a potential
area for improvement.

Solvency: The company's solvency ratios indicate a manageable level of debt. The total debt
ratio of 0.47 and the long-term debt ratio of 0.20 both suggest that the company is not overly
reliant on debt financing. The debt-equity ratio of 0.88 indicates that there's a moderate amount
of debt in relation to equity, which is worth monitoring to ensure sustainable financing.

Efficiency: The company's efficiency ratios show mixed results as well. While the inventory
turnover and receivable turnover ratios indicate efficient management of inventory and
collections, the fixed asset turnover and total asset turnover ratios suggest that the company
could potentially improve its utilization of assets to generate revenue.

Additionally, consider qualitative factors such as the company's market position, competitive
landscape, growth prospects, and management strategies. A comprehensive analysis of both
quantitative and qualitative aspects will provide a more accurate understanding of the company's
overall financial health in comparison to industry averages.
Capital Budgeting

4. Titanic, a shipbuilding company, is planning to enter into a contract to build a small cargo
vessel. If the plan is materialized, it will involve the construction of a small building that will
house its people. The cash outlay for the building will be P1,000,000. In addition, equipment will
be purchased and installed near the port, and it will cost them P750,000. The estimated life of
the building and equipment is five years. To finance its planned investment, the company will
issue common stocks at a par value of P100 with an expected dividend of P12.00 per share. The
tax rate is 40%.

The expected net income before tax from the project is a follows:

Year 1 350,000
Year 2 325,000
Year 3 400,000
Year 4 425,000
Year 5 475,000

Required: Recommend whether or not to enter into a contract to build a small cargo vessel,
Rationalize your recommendation with the use if discounted payback period, net present value
and the profitability index.

Answer:

Given data:
 Initial investment: P1,750,000
 Discount rate: 10%
 Expected cash flows after tax and dividends (calculated previously)

A. Discounted Payback Period:

The discounted payback period is the time it takes for the discounted cash flows to recover the
initial investment. To calculate the accumulated discounted cash flows year by year until they cover the
initial investment.

Year 1: P180,000
Year 2: P148,936.12
Year 3: P169,745.17
Year 4: P160,883.54
Year 5: P182,650.25

Total accumulated cash flows after each year:

Year 1: P180,000
Year 2: P328,936.12
Year 3: P498,681.29
Year 4: P659,564.83
Year 5: P842,215.08

The discounted payback period falls between Year 3 and Year 4, indicating that by the end of
Year 3, the cumulative discounted cash flows are not yet sufficient to cover the initial investment. This
suggests some level of risk or uncertainty in the project's ability to generate positive returns within a
reasonable time frame.

B. Net Present Value (NPV):

The NPV measures the difference between the present value of cash inflows and the initial investment.
A positive NPV suggests that the project is financially attractive.
NPV = P180,000 + P148,936.12 + P169,745.17 + P160,883.54 + P182,650.25 - P1,750,000
NPV ≈ -P977,785.92

The negative NPV implies that the project's expected returns are not sufficient to cover the initial
investment and desired rate of return (10%). This indicates that the project might not be economically
viable under the given assumptions.

C. Profitability Index (PI):

The PI is the ratio of the present value of future cash flows to the initial investment. A PI greater
than 1 indicates a potentially viable project.

PI = (P180,000 + P148,936.12 + P169,745.17 + P160,883.54 + P182,650.25) / P1,750,000

PI ≈ 0.5007

The profitability index of approximately 0.5007 is less than 1, further confirming that the project
may not generate adequate returns to justify the initial investment.

For the Recommendation:

Under the existing assumptions, it would be prudent for Titanic not to enter into the contract to
build the small cargo vessel, according to the analysis of the Discounted Payback Period, Net Present
Value, and Profitability Index. The project is unlikely to produce enough returns to cover the initial
investment and achieve the company's intended rate of return, according to the negative NPV and poor
profitability index. It's crucial to review the presumptions, think through alternate outcomes, and
possibly look for additional investment options with superior financial outlooks.

Weighted Average Cost of Capital

5. KLEM Corporation is considering a project for the coming year that will require an investment
cost of P100,000,000. The company plans to finance the project by a combination of debt and
equity,a s follows:
 Issue P20,000,000 of 10-year bonds at a price of 102, with an interest rate of 10% and flotation
cost of 3% of par.
 Use P80,000,000 of funds generated from earnings retained in the business. The expected
market rate of return is 14%. The current rate of Treasury bills is 8%. The coefficient for KLEM
Corporation is 1.2. The corporate income tax rate is 30%.

Required:

A. Discuss the difference between the constant dividend growth model and the capital asset
pricing model (CAPM) with respect to determining the weighted average cost of capital.
B. Assuming that the CAPM method will be used, determine the weighted average cost of
capital for KLEM Corporations project.

A. Difference between Constant Dividend Growth Model and Capital Asset Pricing Model (CAPM) for
WACC:

Answer:

The Weighted Average Cost of Capital (WACC) is a crucial financial concept that represents the
average cost of the company's various sources of capital, weighted by their proportions in the capital
structure. It's used as a discount rate for evaluating the feasibility of investment projects, and there are
two main approaches to calculating it which is the Constant Dividend Growth Model and the Capital
Asset Pricing Model (CAPM).
 So, the differences between these two approaches in terms of determining the WACC is that the
constant Dividend Growth Model is primarily used to calculate the cost of equity capital, which is a
component of WACC. This model assumes that dividends will grow at a constant rate indefinitely. It's
often applicable to mature companies that have a stable and predictable dividend payout policy. The
constant dividend growth model considers only the equity component of the capital structure and
doesn't take into account the cost of debt or other sources of financing.
Therefore, when using this model, the WACC would only include the cost of equity. While,
CAPM is a more comprehensive approach to calculating the cost of equity, which also takes into
account the risk associated with the company's equity. It considers the risk-free rate, the market risk
premium, and the company's beta (systematic risk) to determine the expected return on equity. And the
context of calculating WACC, the CAPM is used to determine the cost of equity, which is then weighted
with the cost of debt and other financing sources.
Otherwise, the Difference in Determining WACC:The key difference between the two
approaches lies in what components of the capital structure they consider. The constant dividend
growth model focuses solely on equity financing and dividends, while the CAPM takes into account the
systematic risk associated with the company's equity because when calculating the WACC, the CAPM
approach is more comprehensive and realistic because it considers both the cost of equity and the cost
of debt, weighted according to their proportions in the capital structure. It provides a better
representation of the overall cost of capital for the company, accounting for both equity and debt-related
factors.
In summary, the constant dividend growth model focuses exclusively on equity financing and
dividends, while the CAPM takes a more holistic approach by incorporating the risk associated with
equity. When determining the WACC, the CAPM is a preferred method as it considers the
comprehensive cost of both equity and debt financing.

B. Weighted Average Cost of Capital (WACC) for KLEM Corporations project using the capital
Asset Pricing Model (CAPM) are the following:
1. To calculate the cost of equity (Re):
Rf= 0.08 (current rate of Treasury Bills)
B = 1.2
Rm = 0.14 (expected market rate of return)
Re = 0.08 + 1.2 X (0.14 - 0.08) = 0.134 0r 13.4%

2. To calculate the weight of equity and debt:

Market value equity (E) = P 80,000,000 (funds generated from earnings)
Market value of debt (D) = P 20,000,000 (face value of bonds)
Total market value (V) = E + D
V = 80,000,000 + 20,000,000 = 100,000,000
Weight of equity (E/V) = E/V
Weight of debt (D/V) = D/V
Given:
Cost equity (Re) = 13.4% 0r 0.134
Weight of equity (E/V) = 80,000,000
100,000,000
Cost of debt (Rd) = 9.3% or 0.093

Weight of debt (D/V) = 20,000,000

100,000,000
Corporate income tax rate (Tc) = 0.30

3. To calculate the WACC:

Given the corporate income tax rate (Tc) = 0.30
Diven the cost of debt (Rd) = 0.093 or 9.3%
WACC =80,000,000 X 0.134 + 20,000,000 X 0.093 X (1-0.30)
100,000,000 100,000,00
WACC = 0.1076 0r 10.76%
 Therefore, the correct Weighted Average Cost of Capital (WACC) for KLEM Corporation's
project, using the CAPM method and the proper weights of equity and debt, is approximately 10.76%.

Section 02: Decision Making Skills

Working Capital Management

6. Palm Company's budgeted sales for the coming yea are P40,500,000, of which 80% are
expected to be credit sales at terms of n/30. Palm estimates that a proposed relaxation of credit
standards will increase credit sales by 20% and increase the average collection period from 30
days to 40 days. Assume 360 days a year.

Required: Determine whether or not the proposed relaxation of credit will benefit the company.
Support your answer with appropriate solutions.

Answer:

For the Calculation:

Given Data:
1. Budget Sales : P 40,500,000
2. Credit Sales Percentage : 80%
3. Current Credit Terms : n/30 (net 30)
4. Proposed Credit Sales Increase : 20%
5. Proposed Collection Period Increase : from 30days to 40days
6. Number of days in a year : 360

To calculate the following:

1. Current Credit Sales
Current Credit Sales = Budgeted Sales X Credit Sales Percentage Current
Credit Sales = P40,500,000 X 0.80
Current Credit Sales = P32,400,000

2. Proposed Credit Sales Increase:

Proposed Credit Sales Increase = Current Credit Sales X Proposed Increase Percentage
Proposed Credit Sales Increase = P32,400,000 X 0.20
Proposed Credit Sales Increase = P6,480,000

3. Total Credit Sales with Proposed Increase:

Total Credit Sales with Proposed Increase = Current Credit Sales + Proposed Credit Sales
Increase
Total Credit Sales with Proposed Increase = P32,400,000 + P6,480,000
Total Credit Sales with Proposed Increase = P38,880,000

4. Increase in Collection Period:

Increase in Collection Period = Proposed Collection Period - Current Collection Period
Increase in Collection Period = 40 days - 30 days
Increase in Collection Period = 10 days

5. Impact on Average Daily Credit Sales:

Average Daily Credit Sales = Total Credit Sales with Proposed Increase / Number of Days in a
Year
Average Daily Credit Sales = P38,880,000 / 360
Average Daily Credit Sales = P108,000

6. Increase in Receivables:
 Increase in Receivables = Average Daily Credit Sales * Increase in Collection Period
Increase in Receivables = P108,000 X 10 days
Increase in Receivables = P1,080,000

Analysis:
Palm Company's credit sales are anticipated to rise to P38,880,000 if its proposed credit rules
are relaxed, and the average collection duration will lengthen by 10 days. A P1,080,000 rise in
receivables would result from this. Before making a choice, the corporation must carefully analyze
these possible effects on its cash flow and financial performance.

To Calculating the Net Impact:

To make an informed decision, the company should calculate the net impact on profitability,
considering the potential increase in sales and the increase in bad debt expenses. If the increased
sales outweigh the potential bad debt losses and additional costs, the relaxation of credit standards
could be beneficial.

1. Potential Increase in Gross Profit:

Additional Credit Sales: P6,480,000 (calculated earlier)
Gross Profit Margin (assumed): 30% (for calculation purposes)
Potential Increase in Gross Profit = Additional Credit Sales X Gross Profit Margin
Potential Increase in Gross Profit = P6,480,000 X 0.30 = P1,944,000

2. Potential Increase in Bad Debt Expenses:

Historical Bad Debt Rate (e.g., 5% of credit sales)
Increase in Bad Debt Expenses = Total Credit Sales with Proposed Increase X Bad Debt Rate
Increase in Bad Debt Expenses = P38,880,000 X 0.05 = P1,944,000

Analysis:
The overall effect on profitability could be negligible when comparing the potential increases in
gross profit (P1,944,000) and bad debt charges (P1,944,000). This assessment, though, oversimplifies
the scenario and ignores other elements including decision sustainability over the long term, cash flow
issues, and administrative costs.

In the end, the choice should be based on a thorough financial analysis that takes into account
all of the potential costs, advantages, and risks connected with the suggested easing of credit
requirements. Before making a decision, it is advised that Palm Company engage with financial
professionals, carry out an exhaustive risk analysis, and take into account the company's overall
strategic goals.

Inventory Management:

7. Diesel Fashion estimates that 90,000 zippers will be needed in the manufacture of high-selling
products for the coming year. Its supplier quoted a price of P25 per zipper. Diesel planned to
purchase 7,500 units per month, but its supplier could not guarantee this delivery schedule. In
order to ensure the availability of these zippers, Diesel is considering the purchase of all these
90,000 units on January 1. Assume Diesel can invest cash at 12%.

Required: Recommend the best course of action for the company with respect to the timing of
the purchase of inventory and related opportunity cost. Support your answer with appropriate
solutions.

Answer:

We must weigh the costs and advantages of buying all 90,000 zippers at once vs making
monthly purchases in order to suggest to Diesel Fashion the optimal course of action with regard to the
timing of the acquisition of inventory and the associated opportunity cost. The main considerations in
this case are the potential cost of retaining inventory and the advantages of assuring a consistent flow
of zippers.
Option 1: Monthly Purchase Plan
Quantity per month : 7,500 units
Cost per unit : P25
Holding cost rate : 12% per annum

Option 2: Purchase All on January 1st

Quantity : 90,000 units
Cost per unit : P25
Holding cost rate : 12% per annum

The costs and benefits of each option:

Option 1: Monthly Purchase Plan

Total cost for the year : 12 months X 7,500 units X P25 = P2,250,000
Holding cost for the year : (Total cost / 2) X Holding cost rate
=(2,250,000/2) X 0.12 = P135,000

Option 2: Purchase All on January 1st

Total cost for the year : 90,000 units X P25 = P 2,250,000
Holding cost for the year : (Total cost / 2) X Holding cost rate
= (P2,250,000/2) X 0.12 = P135,000

Option 1:
Total Cost + Opportunity Cost
= P2,250,000 + P 135,000
= P2,385,000

Option 2:
Total Cost + Opportunity Cost
= P2,250,000 + P 135,000
= P2,385,000

Opportunity Cost:

The return that could be obtained if the money spent in inventory was placed in a different
investment instead is known as the opportunity cost. The potential return on investing the money
elsewhere at a 12% annual rate in this situation is the opportunity cost.

We now examine the overall expenses for both options (including holding charges) as well as
the opportunity cost of keeping the cash locked up in inventory for each option. It would be better to
choose the option with the lower overall cost (including holding fees and opportunity costs).

Recommendation:

Both solutions appear to have the same total cost when total costs and opportunity costs are
calculated and taken into account. In this situation, flexibility and risk may be more important
considerations than cost reductions.

Diesel Fashion will have more freedom and a lower chance of locking up a significant sum of
money in inventory if they choose for the monthly purchasing plan. On the other hand, if they decide to
buy all of the inventory on January 1st, they will gain from a consistent supply at the risk of using up all
of their available finances for the year.
 A detailed analysis of the company's cash flow, risk tolerance, and overall business strategy
should serve as the foundation for the final choice. The monthly purchase plan could be considered if
flexibility and risk reduction are important. Buying all of the inventory at the start of the year might be
the preferable option if supply certainty is crucial.